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Read the case study below and prepare a Business Report as per the below requirements; A UAE based company called Afreen Trading is engaged in

Read the case study below and prepare a Business Report as per the below requirements;

A UAE based company called Afreen Trading is engaged in the manufacturing, exporting and supplying of the beautiful Ladies Hand Bags in three different colours, White, Brown and Purple, which are all manufactured from the same form of raw material including pearl buffalo horn plates. The Company has used traditional full costing to allocate overheads to its products using direct labour hours. The Company is now considering using an activity-based costing system to improve its profitability. Information for the three Hand bags is given below for your analysis:

White

Brown

Purple

Production Volume (Units)

30,000

24,000

36,000

Raw Materials Per Unit (kg)

1.5

2.4

3.0

Direct Materials Costs Per Unit ($)

3.6

5.76

7.2

Direct Labour hours Per Unit (Hrs)

0.2

0.3

0.4

Direct Labour Cost Per Unit ($)

5.92

8.88

11.84

Other Operational Data

Machine Hours Per Unit (Hrs)

0.5

0.7

0.9

Production Runs

32

24

16

Number of Purchases

48

56

84

Number of Deliveries

96

60

124

Selling Price Per Unit ($)

18.5

35

40

The price for raw materials per kilogramme is $2.40 and the direct labour cost per hour is $29.60.

The annual overhead costs along with the relevant cost drivers have been analysed below:

Overhead Cost Centre

Cost Driver

$

Machine Set Up Costs ($)

Production Runs

74,000

Machine Running Costs ($)

Machine Hours

120,000

Purchasing Costs ($)

Number of Purchases

94,000

Delivery Costs ($)

Number of Deliveries

112,000

Total

400,000

Required:

  1. Calculate the full cost per unit for products White, Brown and Purple under traditional absorption costing, using direct labour hours as the basis for absorption.

Also Calculate the full cost per unit of each product using ABC (activity-based costing). [10%]

  1. Discuss the reasons for the changes in cost per unit when the costing system are changed from traditional absorption costing to ABC. [20%]

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